Congressional Democrats Oppose Tax Breaks for Wealthy in Puerto Rico
Recent press reports confirm Bernie Sanders and Elizabeth Warren are among 34 Democratic Party leaders in Congress opposing tax shelters for the “super rich” in Puerto Rico. Yet, it was Democratic Party leadership in Congress that instigated and for decades perpetuated Puerto Rico’s economic and political dependence federal and local tax shelters.
Ironically, in 1992 presidential candidate Bill Clinton proposed tax reforms eliminating what he and moderate “New Democrats” called “corporate welfare” tax loopholes Congress had created for Puerto Rico in the 1970’s. At that time large Fortune 500 companies from the U.S. mainland, especially big pharmaceutical manufacturers, were evading billions in annual federal taxes by sheltering earnings of subsidiaries in Puerto Rico under Section 936 of the Internal Revenue Code.
According to Bob Woodward’s book The Agenda, U.S. Senator Daniel Moynihan of New York admonished Clinton not to tamper with Section 936. Moynihan argued Section 936 was an inexpensive way for Washington to justify indefinite territorial status, instead of deciding between the constitutionally defined future political status options of statehood or independent nationhood.
Later Government Accounting Office projections demonstrated Moynihan’s estimates of increased public sector costs were exaggerated. He also failed to consider the history of private sector led growth all territories experience once statehood became attainable.
In 1994 Republican House Speaker Newt Gingrich called Clinton’s bluff on Section 936. Notwithstanding Moynihan’s warning Clinton agreed to phase out of Section 936 over a ten-year period.
Wall Street Banks and Socialists Defend Tax Shelters
Section 936 was touted as a “job creation” and “anti-poverty” tool for Puerto Rico. In reality, Section 936 was command economics even too far left for FDR’s New Deal agenda. Emerging from LBJ’s Great Society social engineering experimentation, Section 936 made tax evasion by super rich special interests a federal policy legacy in Puerto Rico.
The anti-statehood party in Puerto Rico embraced Section 936 as a “pillar” of the “commonwealth” regime of territorial government Congress created in 1952. Left wing “autonomists” claimed “commonwealth” was a sovereign status and local law ratifying Section 936 made it “unalterable without local consent.” As recently as 2016 the U.S. Supreme Court confirmed “commonwealth” is a revocable delegation by Congress and all local powers remain subject to supremacy of federal law.
That did not stop the anti-statehood socialist “commonwealth” party in Puerto Rico from collusion with titans of Wall Street profiting from Section 936 to make federal and local tax shelters the lynchpin of the territory’s economic development strategy. Cleverly branding Section 936 as a form of “fiscal autonomy,” the anti-statehood party and Wall Street “corporate welfare” beneficiaries sent a small army of lobbyists into Congress promote permanent reliance on expanding federal and local tax shelters to sustain the “political autonomy” of Puerto Rico.
This unholy alliance between Wall Street and the anti-statehood “commonwealth” party was driven by the need to delay and if possible prevent transition of Puerto Rico to statehood. The equal footing and uniform taxation doctrines for even-handed treatment of states would not allow Section 936 to continue under statehood. To perpetuate the “commonwealth” regime dependence on corporate tax breaks that are constitutionally allowed in a territory but not a state was a strategy by Section 936 profiteers to make statehood or independence less attractive than the status quo.
The mastermind of corporate and political special interest campaign fundraising to buy support in Congress for Section 936 was Charlie Black, powerful lobbying partner of Paul Manafort and Roger Stone. But even the political contributions largesse of the companies exploiting Section 936 could not conceal the reality of corporate profits materially disproportionate to job creation or other economic benefits to the territory.
Combined high unemployment and stagnation in small business and other economic sectors not subsidized by Section 936 tax shelters eroded public support for the “commonwealth” regime. In 1993 and 1998 local status votes the “commonwealth” regime and its trademark Section 936 taxation scheme failed to win a majority, while the statehood vote pulled even with the status quo.
Autonomy Without Accountability
Anti-statehood autonomists blame the fiscal collapse of the “commonwealth” regime in 2015 on phase out of Section 936. That ignores the impact of mass island-wide military base closures costing a loss of over 6,000 federal jobs with good pay and benefits, as well as a $300 million loss of annual military spending in the territory. Thousands of skilled workers accustomed to good pay and benefits chose relocation to the 50 states.
Meanwhile, demands by the public for a more state-like standard of living led to fiscally irresponsible expansion of the debt financed public sector. With little federal oversight the “commonwealth” regime borrowed excessively, becoming a case study in territorial autonomy without accountability.
Without increased private sector investment and growth that comes with statehood, the borrowing binge seeking state-like economic development became the proximate cause that led to the fiscal implosion of 2015. That was followed by the historic 2012 vote by a 54% majority to end the current status, and 61% vote for statehood.
Even then autonomists and their allies in Congress stubbornly opposed any political status change for Puerto Rico. Instead of defining terms for a vote on statehood or independence (without or without a treaty of alliance, or so-called “free association”), Congress authorized funding for a vote on options certified by the Department of Justice.
When the Department of Justice failed to certify status options in a timely and competent manner as required by federal law, Puerto Rico voters elected a pro-statehood local government that conducted a status vote in 2017. 97% voted for statehood.
Finally it seems Democrats and Republicans alike understand tax loopholes cannot sustain an undemocratic political status, or unleash private sector investment supporting Puerto Rico’s economic recovery and development.